If you have been struggling for a long time or have just started investing in crypto, you must have seen a graph of crypto price movements. The chart is formed by a collection of candlesticks that form over time. Through charts, a trader can monitor price movements and perform technical analysis before making a trading decision. This is very important because analysis will help you assess the risk of profit and loss of any potential decisions. If you are still a beginner, learning how to read candlesticks is the first step in investing, which can be quite confusing. In this article, Tokenomy will cover everything you need to know about candlesticks!
What is a Candlestick?
In the crypto space, there are many factors that can influence a trader’s decision-making process in buying and selling assets. One of them is by monitoring a candlestick chart, which shows asset price movements within a certain period of time. It is called a candlestick because its graphic shape resembles a candle with a wick. Candlesticks are one of the most widely used chart types by crypto traders to analyze prices.
The term “candlestick” was first used by Homma, a Japanese rice trader in the 18th century. In his trading experience, Homma realized that there are factors that affect the supply and demand of rice in the market. From this, an idea emerged to monitor price movements through candlestick charts. This concept was later modernized by a journalist from the West named Charles Dow; it eventually entered international trade and is now used in all trading markets in the world.
How to Read Candlesticks
In technical analysis, all crypto price information can be seen from a candlestick pattern. From the pattern, you can make decisions about where the entry and exit points are. By mastering technical analysis, you will find it easier to predict future market trends.
To read a candlestick chart, you need to understand its four main components, as well as common patterns. The four main components of a candlestick chart are:
- Open: shows the initial price of the asset in a fixed period of time.
- Close: shows the price at the end of that fixed period of time.
- The high and low components represent the highest and lowest prices the asset reached during a fixed period of time.
For example, if the opening (open) price of Ethereum assets is at Rp.100 million and the closing (close) is at Rp.110 million, the candlestick that appears will be green or is called a bullish candle. Understanding these four basic components is essential to reading candlesticks. Another thing to consider in technical analysis is whether the asset is in a bullish state (when the candlestick color is green) or bearish (when the candlestick color is red). The green color indicates that the asset’s closing price was higher than its open for a period and an increased interest in the asset. Red indicates that the closing price was lower than the asset’s opening, which can also be interpreted as a sign of decreased interest in the asset and a signal to sell the asset.
In addition, you can also perform technical analysis through candlestick charts based on a specific time period. You can adjust the period starting from a matter of minutes, hours, days, weeks, and months. The candlestick pattern will show the candle arrangement of the crypto assets traded within a selected time range.
Support and Resistance Levels
In conducting technical analysis, reading support and resistance levels is very important to help find the best entry point. Support and resistance are used to refer to certain price levels that keep prices from being pushed in an unwanted direction. Both are predefined levels indicating a reversal of the asset’s price trend. Traders generally buy at support levels and sell at resistance levels. So, what are support and resistance levels?
1). Support Level
A support level is formed when the price of a crypto asset stops decreasing after a certain limit. However, if the sellers carry more momentum, a new support level may form if the price breaks below the previous support level and continues to decline. When this happens, there are several implications:
- Traders have waited too long for the market to recover so have sold their assets to minimize their losses.
- Short-term traders are in control and are trying to add more momentum to their positions.
- The drop in prices has made many traders start to buy assets.
2). Resistance Level
A resistance level is formed when the price of the crypto stops rising. If buyers bring enough momentum, then the resistance level can be broken. Resistance is also considered a sky barrier because this price level prevents the market from moving the price higher.
Making Trading Decisions
From the above explanation of candlestick charts, we learned that price movements in the crypto market are also influenced by the psychological state of market participants. For example, when the price conditions fall below a support level, the greed or optimism of traders will dominate and they tend to decide to buy at this position. Conversely, when prices rise, trader pessimism begins to appear and they will sell assets to avoid losses. Therefore, you must really master technical analysis and also control your psychology in making trading decisions. From there, you can make decisions about when to buy or sell assets for a profit.
If you are a beginner, it’s a good idea to learn more about candlestick charts and patterns so that your technical analysis is sharper. Continuous practice is also something you need to do. On Tokenomy, you can practice with a demo account and virtual funds. These artificial assets can be spent free of charge and be topped up over and over again. By practicing using a demo account, you can develop your knowledge of technical analysis without fear of losing big capital. Once you are confident in your technical analysis skills on a demo account, you can start trading crypto safely on Tokenomy. What are you waiting for? Register your Tokenomy account today to start trading!